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Wednesday, April 30, 2014

Not much has changed in the past quarter for Oshkosh (OSK) and that's not necessarily a bad thing. The company's aerial work platform business is recovering, but Oshkosh and Terex (TEX)
are still waiting on rental companies in North America to renew their
fleets. The potential for activist-prompted moves is still here, and it
increasingly sounds as though management is considering an acquisition.
Oshkosh still looks undervalued on the basis of construction and
commercial vehicle prospects, with defense offering a highly binary
outcome later next year, but delays in a U.S. construction recovery
remain as a meaningful risk factor.

Over the past year, a lot of the industrial conglomerates have moved together in a fairly tight group, Eaton (ETN)
included. Given the company's middle-of-the-road financial performance
and fairly average valuation, Eaton looks like an okay pick, but not
necessarily anything special. The company still has the potential to
drive additional savings and leverage from the Cooper deal and harness
improving conditions in vehicle and aerospace markets, but the company's
industrial business isn't offering the same prospects.

There's no doubting now that the operating environment for the North American Class 8 truck industry is getting better, and Cummins (CMI)
stands to be a major beneficiary. European and Chinese truck markets
are also looking stronger, helping to offset weakness in other areas
like Brazilian trucks and power generation. Cummins shares are already
up about 28% over the past year, and BorgWarner (BWA) and Dana (DAN) may offer a little extra relative performance, but I wouldn't rush to take profits just yet.

No company has ever announced a merger with "this is a
value-destroying transaction that we're launching because we want a
bigger fiefdom and don't really know how to build value." That said,
while investors are wise to be very skeptical about the synergies
companies promise with merger announcements, Tuesday's announced merger
between Orbital Sciences (ORB) and Alliant Techsystems (ATK) looks like a really good opportunity to build a stronger business.

As
I had valued Orbital at around $31 per share in February, and I
calculate a value of about $31 in Alliant's offer for the company, I
can't say that this is an unfair deal for either side. What's more, for
those shareholders willing to hold on and see how the synergies play
out, this could be a case where 1+1 equals something meaningfully more
than "2".

In one bad quarter, ABB (ABB)
appears to have undone a lot of the goodwill it had built up over the
past year. Investors have been nervous for some time about ABB's very
active board (which has led to two premature CEO departures), an
uncertain M&A strategy, and the company's business mix, as well as
its uncanny tendency to do well/poorly when others are doing the
opposite. While the stocks sizable decline in the wake of the first
quarter disappointment seems a little extreme, ABB is likely to find
itself back into the "show me" penalty box of Wall Street.

Rock-Tenn (RKT)
is a fairly well-respected company in the paper packaging industry, but
the company has struggled to generate appreciably better returns on
capital over time. I suspect that is at least part of the reason that
the company has lagged both International Paper (IP) and Packaging Corp (PKG) over the long term and other players like Graphic Packaging (GPK) and MeadWestvaco (MWV) more recently.

The
company took on a big operational challenge (and a lot of debt) when it
acquired Smurfit-Stone at a generous price in 2011, but the company has
likely not maxxed out the potential synergies and operational
improvements here. I do have some concerns about the near-term health of
the corrugated and containerboard markets, but it looks as though the
shares already factor in a fair bit of that risk.

Conditions seem to have improved in a big way for industrial conglomerate Roper (ROP)
in a relatively short time. Not only did Roper beat expectations for
the quarter, but the company delivered one of the best results in its
sector. Roper is seldom an exceptionally cheap stock, but valuation
isn't too demanding and the combination of good order momentum and an
active hunt for M&A could lead to a more active 2014 for
shareholders.

Monday, April 28, 2014

This is definitely a season of deals in the health care space, with Forest Labs (NYSE: FRX) choosing to add another asset to its GI business ahead of its anticipated merger with Actavis (NYSE: ACT) . Forest Labs is offering a significant premium for Furiex Pharmaceuticals (NASDAQ: FURX)
and there are still FDA-related risks in play, but it seems like a
reasonable offer for what could prove to be a highly synergistic asset.

By most standards, Covidien (NYSE: COV)
has been a superior performer in the med-tech sector. That hasn't
always shown up in the company's stock performance, however, as rebound
stories like St. Jude Medical, Boston Scientific, and Bard have
raced ahead. With Covidien announcing a noisy quarter with some
apparent seasonal pressures on Friday, it looks as though Fools have an
opportunity to add shares in a high-quality name at a pretty interesting
valuation.

The first-quarter earnings report for the fourth-largest energy services provider, Weatherford International (NYSE: WFT)
, was not flawless in terms of growth or margins. What was, and is,
more important is that the company has very clearly put itself on a path
of serious self-improvement and is remaking itself into a high-margin
provider of services with relatively little overlap with the big three
-- Schlumberger (NYSE: SLB) , Halliburton (NYSE: HAL) , and Baker Hughes (NYSE: BHI) .

With this progress, the penalty to Weatherford's earnings before
interest, taxes, depreciation, and amortization multiple no longer seems
as appropriate, and these shares continue to look undervalued as an
improving play on unconventional reservoirs.

These are good times for investors to start thinking about putting
together shopping lists for speculative healthcare stocks, as the market
has been bailing out on not only biotechs but also speculative
med-techs. AtriCure (ATRC)
isn't speculative in many important respects, as the company has
approvals for its key products, but is still quite speculative insofar
as the company's ability to convince doctors to adopt its surgical
ablation approach and generate meaningful revenue and profits.

A sector-wide re-rating can be a powerful driver for a stock, and so it has been for Basic Energy Services (BAS).
Amidst an improving outlook (or at least perceived outlook) for energy
service stocks, Basic Energy has been one of the strongest names -
handily beating Schlumberger (SLB) and Halliburton (HAL) so far this year, as well as most other small/mid-cap service names like Key (KEG), Superior (SPN), RPC (RES), and C & J Energy Services (CJES).

While
I thought that Basic Energy had been overlooked back in 2013, it's hard
to make the same argument now that sector-wide forward EV/EBITDA
multiples have moved from 5x to 6x to 7x to 8x. Basic Energy is likely
to see good improvements in its core Permian market in 2014, and those
improvements are going to be an important part of the remaining upside
in these shares as sentiment has already improved markedly.

Investors have gotten quite a bit more bullish about prospects for the
energy service companies over the last three to six months, largely due
to increased optimism that U.S. land conditions really are improving.
That should be good news for Superior Energy Services (SPN),
as should the signs that deepwater Gulf of Mexico activity is turning
around. The real question for Superior, though, is whether the company
can better leverage its "integrated lite" operating structure and start
delivering better returns for shareholders.

As I expected back in February, Old Dominion's (ODFL)
fourth quarter was just a bump on the road and business has gotten back
to normal. Normal is a very good thing for Old Dominion, as the
company's superior service quality continues to fuel share gains and
good cost control allows the company to thrive with relatively lower
price increases than its competition. Old Dominion shares aren't cheap
by standard valuation metrics, but I believe standard metrics may be a
little too confining for a significantly above-average operator.

Because Microsemi (MSCC)
zigs where most other chip companies zag, it never really seems to fit
in with the general sentiment on chips. That's a plus when chip stocks
go into the tank, but it can be frustrating when there's relatively more
optimism about the semiconductor space. Given Microsemi's position in
timing/synchronization and its growing FPGA business, I'm content to
continue holding these undervalued shares, but I acknowledge that the
company's erratic progress on revenue growth and margins will frustrate
many investors.

The wait goes on at Ultratech (UTEK),
and it's not a particularly pleasant one for investors (nor, I imagine,
the company's executives and employees). Management noted increased
quoting activity for LSA systems and continues to expect orders and
shipments to materialize soon, but investors are left in a frustrating
grey zone wondering when foundries will make their orders and how the
annealing market will shake out between Applied Materials (AMAT), Ultratech, DNS (OTC:DINRY), and Mattson (MTSN).

Ultratech's
first quarter results do offer a reminder that the company has other
credible business lines, including advanced packaging and tools for high
brightness LED manufacturing, but it is the ramp in laser spike
annealing tools that will make or break the stock in the near term.
Ultratech could still trade into the $30s from here, and investors are
now only a quarter or two away on better visibility into this next round
of annealing tool orders.

Friday, April 25, 2014

The opportunity to leverage plentiful U.S. low-cost natural gas reserves into LNG exports is real and CB&I (CBI)
has built itself into one of the best engineering, procurement, and
construction companies in that space. Along the way it has also
positioned itself as a strong player in chemicals and power, as well as a
provider of process technologies for the chemical, refining, and gas
processing markets.

CB&I has over 10 quarters of revenue
already in the order book, and there is still the possibility (if not
probability) of additional awards in LNG, chemicals, and OUS power
plants. The catch, as is so often the case, is in the valuation. There's
a pretty long record of EPC companies trading at forward EV/EBITDA
multiples in the 8x to 10x range, and applying that range to CB&I
doesn't point to much upside in a stock that has already risen 60% in
the last year, 100% in the last two years, and almost 700% in the last
five years.

About four months ago, I pointed outAllied World Assurance (AWH)
as a high-quality specialty liability-focused insurance company that
was trading a little rich for my tastes. With the stock having lagged
the S&P 500 by about 6% since then, due in part to concerns about
reserve strengthening in the professional healthcare liability space and
overall worries about P&C insurance, now the valuation is starting
to look a little more interesting.

It's probably true of all industries to some extent, but the
enterprise/network security business seems to be one where there's
always some nagging detail for the companies. Check Point (CHKP) has fantastic margins, but hasn't always been quick to innovate and seems willing to cede margin to maintain share. Palo Alto (PANW) has a great sales effort, but sometimes seems to overstate its own capabilities. For Fortinet (FTNT),
the challenge is pairing good revenue growth and share gains with
strong margins, and judging by management's guidance that challenge will
continue on at least another quarter.

For a company with relatively modest underlying growth trends, C.R.Bard (BCR)
has generated a fair bit of enthusiasm on the Street for the enhanced
growth prospects bought through M&A and the royalty stream from Gore.
Among the acquired products, investors are particularly keen on the
prospects for the Lutonix drug-coated balloon and management's comments
on the earnings call only seemed to add more confusion to already noisy
situation. Bard is not a particularly cheap stock at these levels and
the company is going to need better organic growth and clear
differentiation in drug-coated balloons to support further gains.

There were some solid positives in Federal-Mogul's (FDML)
first quarter, as the company's Powertrain business handily outgrew the
light vehicle markets in North America and Europe and the company
successfully refinanced some large outstanding debt balances. There's
more work to do on margins, though, and the company is facing
increasingly difficult comps, higher interest expense, and integration
expenses from three recent acquisitions. Federal-Mogul still looks
undervalued today, but that's not exactly a consensus opinion and the
company's high debt level increases the overall risk.

Four months ago, I was not too keen on paying up for W.R. Berkley (WRB)
shares in the face of an increasingly difficult insurance environment,
higher leverage, and a rich valuation. Since that late December piece, WRB shares are basically flat, while my preferred choice, RenRe (RNR),
is up around 10%. On a positive note, W.R. Berkley continues to execute
at an above-average level, and that makes it a little harder to fret as
much about the valuation.

Thursday, April 24, 2014

This looks to be an interesting year in the energy capital equipment space, as large E&P companies like Petrobras, Total, and BP
look to move forward with ambitious plans to develop deepwater fields.
While order growth may not be as strong for companies like Cameron (NYSE: CAM) , National Oilwell (NYSE: NOV) , FMC Technologies (NYSE: FTI) , General Electric, or Drill-Quip (NYSE: DRQ)
, it is definitely an opportunity to execute and show operational
excellence. In particular, Cameron needs to show that its $11 billion
backlog can be successfully converted into higher-margin cash flows.

In mid-December I wrote that there was at least some chance that ortho giant Zimmer (NYSE: ZMH) would make a bid for Biomet
and become the dominant company in hip and knee implants, as well as
leverage stronger share in areas like extremities, dental, trauma, and
spine. That speculation has come to pass, as Zimmer has announced a
$13.35 billion bid for Biomet. Assuming the deal passes regulatory
scrunity, Zimmer is likely to see meaningful cost synergy, but there are
risks involved in devoting such a large amount of capital to a market
with some growth challenges.

The much looked-for industrial recovery seems to be a little behind
schedule, or at least that's one possible interpretation of weak welding
results from Lincoln Electric (LECO) and Illinois Tool Works (ITW). With Colfax (CFX)
due to report tomorrow (as of this writing), investors will have a more
complete picture of a market segment that often correlates pretty
closely with overall economic activity, but the picture isn't as strong
as analysts and investors had hoped.

Lincoln often trades at a
premium valuation, and with double-digit ROICs in the nine of the last
ten years, it's not hard to see why. With that, I'm tempted to think of
pullbacks in the stock as buying opportunities for long-term investors,
though I recognize the risk that a prolonged period of sluggishness in
welding volume will weaken the stock further.

Regional mid-cap bank TCF Financial (TCB)
hasn't been shy about changing its business model to adapt to the new
realities of the banking market. The company has cleared out a lot of
its high-cost capital and shifted its operational focus towards a
national specialty/niche lending platform with a low-cost local deposit
base. The model TCF Financial is following carries above-average risks
and the shares are not particularly cheap by convention means, but this
bank looks poised to be an above-average grower at a time when bank
earnings growth is hard to find.

Wednesday, April 23, 2014

No one will accuse Valeant (NYSE: VRX)
CEO Mike Pearson of lacking boldness. He has laid out a strategy for
turning Valeant into one of the largest pharmaceutical/med-tech
companies in the world and has proven more than willing to turn to bold
M&A moves to make it happen. Valeant's latest move is far and away
the largest – a $47 billion bid (at the time of the offer) for Allergan (NYSE: AGN)
– but the target's acceptance is hardly a sure thing and the company's
views about the pharma industry may give investors reason for pause
regarding the long-term strategy.

It gets harder and harder to criticize a company's valuation when that
company continues to surpass expectations and build its lead on its
rivals. That is the basic story for Illumina (NASDAQ: ILMN) , as this company continues to distance itself from Thermo Fisher (NYSE: TMO)
and other would-be sequencing competitors and build up its bona fides
in the diagnostics market. With a diagnostics opportunity at least twice
as large as the $2 billion sequencing market (and growing at a
double-digit rate), there seems to be enough growth potential to keep
investors keenly interested in this name.

Definitely not a household name for most American readers, Spain's Almirall SA (OTC:LBTSF)
(ALM.MC) is building an interesting specialty pharmaceutical business
for itself in Europe. Roughly 80% of the company's sales are in Europe
(half of that in Spain) and the company still depends upon in-licensed
products for close to half of its sales, but aclidinium and a newly
expanded dermatology business could lead to meaningful revenue growth
and margin leverage in the coming years.

Almirall certainly still
has challenges in front of it, including getting a combo version of
aclidinium through the FDA approval process and bulking up its drug
development efforts, but the forward valuation doesn't seem demanding
and mid-cap drug companies are being hunted to extinction in the M&A
market.

Investors haven't been too fond of offshore energy service plays over the last six months, with shares of companies like Oceaneering (OII), GulfMark (GLF), Tidewater (TDW), and Technip (OTCQX:TKPPY) all in the red. Against a peer group that has declined from around 5% to 20%, Helix Energy Solutions' (HLX)
roughly 5% decline doesn't seem quite as bad. More importantly, the
company's backlog continues to build and the company is likely looking
at many years of well intervention deepwater support work. Helix looks
about as undervalued as its peer group, but the company's more
aggressive newbuild program and increasing acceptance of the company's
well intervention approach could lead to outperformance.

GulfMark Offshore (GLF)
has a high-quality, high-spec modern marine vessel fleet, but investors
presently seem more concerned about the risks of delays in new rig
deployments in the Gulf of Mexico than the opportunities offered by
higher utilization and dayrates in the North Sea and GoM in the coming
years. GulfMark isn't hands down a screaming bargain today, but I
believe the current market conditions support a bullish outlook for
profit and cash flow generation over the next couple of years.

There's likely always going to be a place for local/regional banks
that focus on customer service and deep relationships as opposed to
cross-selling and cost efficiency. Umpqua Holdings (UMPQ) is one such bank in the Pacific Northwest, where it has the #4 position in Oregon behind Bank Of America (BAC), U.S. Bancorp (USB), and Wells Fargo (WFC) and the #7 position in Washington state.

Umpqua
has a lot going for it, including an uncommon retail-oriented branch
network and strong growth opportunities in leasing. The acquisition of
Sterling not only gives the company more scale in its core operating
areas, but also the prospect of synergies and cost leverage and a more
balanced loan book. The biggest problem is that the Street is already
pretty favorably disposed toward Umpqua and the shares seem to factor in
some pretty bullish expectations already.

Tuesday, April 22, 2014

This seems to be a week for Big Pharma to do big things, and Novartis (NYSE: NVS) and GlaxoSmithKline (NYSE: GSK)
are certainly doing their part. The two companies announced a series
of transactions that seem to offer "win-win" opportunities to clean up
and consolidate some non-core operations for both companies. Though it
seems like Glaxo is getting the better deal, there's arguably less risk
to the Novartis side of the transactions.

Within the higher-growth molecular diagnostics segment of diagnostics, Cepheid (CPHD) remains one of the real up-and-comers. Roche (OTCQX:RHHBY)
still has quite a bit more market share than Cepheid (and/or anybody
else), but Cepheid stands shoulder to shoulder with big names like Abbott (ABT), Becton Dickinson (BDX), and Hologic (HOLX)
and actually has leading share in terms of systems placement. Margins
are still a "build it and they will come" sort of proposition, but as
Cepheid continues to develop and launch high-volume tests, it should be
in position to reap significant leverage down the road.

The
concern here is that the market is already a long ways down that road in
terms of valuation. Even if the company can more than double its share
of the MDx market and generate FCF margins on par with the best
companies, the shares are already well ahead of the implied value.
Assigning Cepheid the typical top-of-the-range med-tech growth multiple
of 8.0x forward sales produces a more attractive $55 target, more than
20% above today's price, but that multiple may be harder to maintain if
the market really is turning away from aggressive growth stories in the
healthcare space.

Bottling is often overstated as a great business. Bottling and selling assorted flavored sugar waters with Coca-Cola (KO) or PepsiCo (PEP)
labels can be a license to print money in some cases, but other factors
like competition, consumer preferences, and the power of retailers can
make a big difference. Investors in Coca-Cola Amatil (OTCPK:CCLAY)
have seen just how significant these factors can be, as the shares of
what has been regarded as one of the best-run Coca-Cola bottlers are
down more than 40% over the past year as a variety of factors have
combined to undermine profits.

In the relatively short time it has been a publicly-traded company, Stock Building Supply (STCK)
has been a solid performer and a good way to play improving residential
housing construction. Up about 30% from early August, Stock has been
outperformed by Universal Forest Products (UFPI), which has climbed about 40%, but has outperformed Headwaters (HW) and Louisiana-Pacific (LPX)
by wide margins. With the company picking up more share of new projects
and looking to improve its mix toward higher-margin products, better
results and a higher stock price seem like reasonable assumptions today.

Costs matter in mining, but not always in the way that investors think.
All things considered, it is better to have the lowest possible cost of
production, but companies like Copper Mountain Mining (OTCPK:CPPMF,
(CUM.TO)) with elevated costs can offer more upside when commodity
prices rise. This company has done many things right, including getting
its southern British Columbia mine up and running both on time and on
budget, but production challenges and high costs loom as ongoing
challenges. These shares aren't tremendously interesting at prevailing
prices, but if copper goes on a tear, these shares should outperform the
peer group.

Monday, April 21, 2014

Big-time pharma mergers have had a mixed track record, with large
combinations often leading to significant cost reductions (and firings)
in sales and administration but at the cost of large disruptions to
R&D. Pfizer (NYSE: PFE) is apparently not afraid to give it another try, as word came out over the Easter holiday that the company has approached AstraZeneca (NYSE: AZN) with a $100 billion-plus bid to acquire this once-struggling pharma giant.

Time will tell if Pfizer can coax AstraZeneca to the negotiating
table and seal a deal, but such a combination may not be as big of a
risk for Pfizer as it may immediately seem.

Sunday, April 20, 2014

The core pawn business at First Cash Financial (FCFS)
has definitely slowed, with weak conditions in both Mexico and the U.S.
That the company has managed this better than most of its rivals is not
all that much comfort, particularly as weaker scrap and retail margins
coupled with higher store expenses has actually led to shrinking
operating income.

The good news is that conditions may be already
starting to improve in Mexico. Discount retailers are seeing improving
traffic and are starting to pull back on more aggressive discounting,
while consumer confidence and job growth are back on the way up. This
may not be a sharp rebound year for First Cash, and investors are likely
getting restless in regards to seeing/hearing more about expansion into
new markets, but the valuation is attractive enough to make it all
worth the wait.

Next-gen security company Palo Alto Networks (PANW)
certainly does not look all that cheap on backward-looking metrics like
price/sales, but the company's share gain prospects and well
above-average growth could lead to more price appreciation from here.
Palo Alto already generates pretty solid free cash flow margins with
less than 15% market share, and as the company looks to turn up the
pressure on Cisco (CSCO) and Check Point (CHKP), margin leverage could move higher.

Certainly,
there a lot of words like "could" and "potential" when it comes to Palo
Alto. The company has built itself into a low-teens market share holder
in the network security space, but Cisco, Check Point, Fortinet (FTNT) and the rest are not going to roll over. Likewise, there are ongoing concerns about the company's litigation with Juniper (JNPR),
the direction of future network security threats and solutions, and the
fundamental long-term profitability of the business. Expectations for
Palo Alto are demanding, and the risk is above-average, but this still
shapes up as a hybrid hardware/software company worth a closer look.

It looks like enthusiasm has drained out of the global farmland
market, as owners in Canada, the U.S., and Brazil are seeing either
slower increases or actual declines in appraised value. This is not
altogether surprising. While it is true that the global population is
growing and these people will need food, that doesn't mean particular
markets cannot and do not get overheated when investors suddenly see it
as "the next big thing."

While I've written at some length about Brazilian and Argentine agriculture companies like Adecoagro (AGRO), Cresud (CRESY), and SLC Agricola (OTCPK:SLCJY), this time around I'm interested in Black Earth Farming (OTC:BLERF).
The legal structure of the company is fairly convoluted; the parent
company is based in the Channel Islands, the subsidiaries are legally
Cypriot and Russian companies, the shares are listed in Sweden as
Swedish Depository Receipts, and the U.S. ticker is the ADR of those
shares. As the farmland assets are in Russia, I'm going to go with
calling this a Russian farmland company.

Whiting Petroleum (WLL)
has built itself over the years into one of the largest landholders in
the Bakken, but instead of giving the company a victory lap, the Street
is worried about whether that acreage is now too mature. Not only does
Whiting's Williston acreage still have more than a little life left in
it, this isn't a one-play story, and the company's potential in the
Niobrara is definitely worthwhile. Investors have more than a few good
investing options in the oil and gas sector today, but Whiting is worth a
closer look.

Thursday, April 17, 2014

Multi-industry conglomerate Danaher (NYSE: DHR)
definitely buried the lede this quarter, as news of the unexpected
retirement of well-liked CEO H. Lawrence Culp next year overshadowed an
otherwise "OK ... but not great" quarter. Losing a good CEO is also a
risk for a company, but Danaher is a consummate example of a company
that reloads instead of rebuilds. These shares are not particularly
cheap and they rarely ever are, but an overreaction to this news could
perhaps create a window of opportunity.

Potential is a word you hear a lot in biotech, but it's also worth
remembering a quote (apocryphally attributed to former Dallas Cowboys
defensive lineman Randy White) that goes "potential is a fancy French
word that means you haven't done yet".

If XenoPort (XNPT) can establish '829 as a true peer to Biogen Idec's (BIIB)
Tecfidera, or possibly better in some respects, the stock is going to
do very, very well. Of course, if the data don't come through, this
company has very little left other than a record of repeated
disappointments.

Back in October Tidewater (TDW)
was one of the relatively few energy service companies that looked
overvalued to me. While I liked the company's strong position in
offshore and deepwater supply vessels, I just didn't think that paying
such a high multiple was reasonable given risks in the North Sea and
Angola, not to mention potential delays in floater and jackup
deliveries.

As it turns out, the shares declined more than 20%
since that piece, with the stock taking a big hit on disappointing third
quarter results. I don't see the results as a sign of any particular
operating deficiency, though, and I believe the reset in valuation and
expectations makes this a much more interesting name to consider today.

About six months ago, I thought that Unit Corp. (UNT)
was undervalued by about 20% to 25% as the company's awkward mix of
E&P, land drilling, and midstream assets led it to being overlooked.
The shares have risen more than 27% since then, with much of that
coming on good fourth quarter results and a significant improvement in
sentiment for land drillers and service providers. Enthusiasm over land
drillers may be getting a little overdone, but Unit still looks too
cheap on a sum-of-the-parts basis and offers worthwhile upside from its
E&P drilling program.

Wednesday, April 16, 2014

It's hard to call it a bad thing when Wall Street likes a stock, but rising expectations can create problems of their own. St. Jude Medical (NYSE: STJ)
seems to have done a good job of selling the Street on the idea that
it has turned over a new leaf and that accelerating growth is around the
corner.

Sell-side price targets are about 20% higher now than at the
beginning of 2014, and the buy/hold/sell recommendation breakdown has
moved from 11-10-3 to 14-8-2 over the past three months, though the EPS
targets for 2014 and 2015 have hardly budged. That optimism may well
explain why St. Jude's "good enough" first quarter wasn't quite good
enough for investors.

Like many other large med-tech companies, Abbott Labs (NYSE: ABT)
remains an exercise in frustration right now. There are pressures
throughout most of the company's business lines, with only the
diagnostics business really showing much growth. Although Abbott's
results were a bit weak compared to expectations, analysts and investors
knew that the company was going to go through this lull and longer-term
expectations are still fairly bullish.

Valuing normal banks on the basis of their returns on tangible
equity, tangible book value, and long-term returns on equity usually
works pretty well. For better and for worse, Bank of the Ozarks (OZRK)
is not at all a "normal bank" and investors have to make their peace
with a demanding valuation to take part in a very strong, very well-run
bank growth story.

The growth side of Bank of the Ozarks looks
fine. While the company is seeing more competition for lending, the
bank's capabilities in specialty and complex real estate lending sets it
apart. Bank of the Ozarks also has the option to expand its leasing
operations and use its equity to expand its asset base. It's tough to
put together a valuation model that goes much past the low $60s for
these shares, but I don't have any particular expectation of getting
them cheap while the growth story remains intact.

Shares of Peru's largest bank, Credicorp (BAP)
have spent the last six months basically just hanging around, with the
shares wobbling between $125 and $140. Investors have been mulling over
changes in Peru's economy, the de-dollarization of the banking sector,
loan growth and default trends, as well as company-specific issues like
recent disappointments in earnings and the promising acquisition of
Mibanco.

I hope it goes almost without saying that investing in a
Peruvian bank carries certain risks above and beyond your typical
investment, though clearly investing in banks like Citigroup (C)
and so on is hardly risk-free. This looks like a well-run bank, though,
and a company that is structured to benefit from both the growth of the
Peruvian economy and the maturation of the Peruvian financial sector.
Shares appear undervalued on both an ROE and book value basis, with
upside to $160 on relatively conservative assumptions.

Shares of corporate payments specialist WEX (WEX)
have hardly been still over the last six months, trading between $80
and $101 and sporting a beta (according to Yahoo! Finance) of 1.96. Even
so, they are almost exactly where they were when I wrote that the company was a well-run player in attractive markets, but that the shares seemed a little expensive.

WEX has made some important moves since October, including acquiring operations in Brazil and acquiring Exxon Mobil's (XOM) European ESSO card business, but actual organic transaction growth has been fairly sluggish and the company's B2B virtual MasterCard (MA)
program is still a faster-growing work in progress. I do see multiple
opportunities for WEX to do better, but there's already a meaningful
amount of growth baked into the share price and I still find myself
wishing for a better entry price.

XL Group plc (XL)
may have nearly gone out of business during the worst of the credit
crisis, but in the time since the company has done a pretty decent job
of repairing its capital situation, even if at a high cost in terms of
dilution. The bigger question today is whether the company can generate
substantially better results for the long-term - while the company looks
over-reserved and over-capitalized, the nature of its underwriting may
well limit the upside.

Tuesday, April 15, 2014

Even the wildest Gilead (NASDAQ: GILD)
bulls seemed to acknowledge that the company was not going to grab and
hold 100% share of the hepatitis C (HCV) market. Now the question seems
to be shifting to just how much share rivals like AbbVie (NYSE: ABBV) , Merck (NYSE: MRK) , Bristol-Myers Squibb (NYSE: BMY) , Johnson & Johnson, and others can credibly hope to gain.

Recent data presentations at EASL continue to support the notion that
Gilead has the best regimen for treatment-naive patients with the most
common HCV genotypes in North America and Western Europe. AbbVie and
Merck are looking increasingly competitive in more challenging patients,
though. What's more, Gilead's decision to pursue aggressive pricing for
its regimen, and the resistance of groups like Express Scripts, raises the question of whether price may prove to be a competitive option.

If you're going to have a "messy" quarter, you probably couldn't do it much better than Johnson & Johnson (NYSE: JNJ)
did in the first quarter. Devices and Consumer continue to log
disappointing results, but the higher-margin Pharma business is more
than making up the difference. Priced for total annual returns in the
mid-to-high single digits, Johnson & Johnson isn't the cheapest
health care play these days, but it remains a good all-weather pick with
one of the best-growing large drug franchises.

Within the world of Big Pharma, Roche (NASDAQOTH: RHHBY)
offers a pretty compelling mix. Not only does Roche have one of the
strongest oncology platforms today, it also offers one of the deepest
pipelines. The company's non-oncology pipeline is not as strong in
volume, but could well make up for that in quality if a couple of
high-risk trials go the right way. Roche's modest debt and large cash
generation capability also raises the prospect of M&A as biotech
valuations quickly become more reasonable.

Monday, April 14, 2014

If a court ruling made late on Friday holds up, the battle for market share in the U.S. between Edwards Lifesciences' (NYSE: EW) Sapien family of transcatheter heart valves and Medtronic's (NYSE: MDT)
CoreValve may be over before it begins. In a rare move for the
med-tech industry, a judge granted a motion for a preliminary injunction
against sales of the CoreValve that would effectively put Medtronic on
ice until at least 2016. Medtronic is going to fight this decision, but
it definitely seems likely to reignite optimism for Edwards' position in
this market.

When I last wrote about Orchids Paper Products (TIS)
in October, I expressed a lot of respect and admiration for this
well-run paper products company, but thought the valuation was a bit
steep. I'm not going to claim that I got that part right; the shares
rose another 20% or so from where I wrote and it was only a sharp
three-day drop in Orchids' stock that brought it back down again. I
still do not believe that these shares are all that cheap, but it's hard
not to like a company with a credible growth plan and a solid dividend.

There are more than a couple of ways to make Cal Dive (DVR)
look cheap. If you look the book value of the company's vessels, it
might be tempting to call the stock undervalued on the basis of its
liquidation value. Likewise, if you look at past utilization rates and
EBITDA margins, it can be tempting to base a strong bull argument on the
basis of substantial earnings leverage once Gulf of Mexico activity
levels recover.

I'm not nailing down the coffin lid on Cal Dive,
but I do see this stock as a more speculative play on better offshore
activity levels in the Gulf. The nature of offshore support functions is
changing, and I believe it favors companies like Oceaneering (OII), Chouset, Subsea 7, Saipem, and Technip (OTCQX:TKPPY) as more work goes to ROVs and deepwater projects. Projects are starting to move forward, though, and Gulf rival Tetra Technologies (TTI)
has sounded relatively bullish on near-term prospects. If Cal Dive can
get more of its fleet working in FY 2014 and continue to move back
toward mid-teens EBITDA margins, a substantially higher share price is
possible.

Lexicon Pharmaceuticals (LXRX)
continues to generate data on its SGLT-1/2 inhibitor LX4211 that
suggest this is an effective and promising medication for treating not
only Type 2 diabetes (the common target for non-insulin medications for
diabetes), but also Type 1 as well. Lexicon's most recent update, a
small short-term Phase II study in Type 1 diabetics is certainly a
positive update, but it's not what investors really want to see. Lexicon
still needs to find a development partner for LX4211 and the ongoing
delays don't help sentiment or the long-term prospects for the drug.

It's always worth remembering that there is more to a stock's performance than just the reported financials. In the case of Titan Machinery (TITN),
fiscal fourth quarter results were not all that greater and there are
still real issues with the business model. Investors liked what they
heard about cost-cutting in the next year, though, and with Yahoo!
Finance showing about one-third of the float held short, it looks like a
short squeeze helped catapult the shares last week.

I saw value up to the high teens on a cash flow-basis last time
I wrote, and I still see a similar fair value after this latest
quarter. I don't like the model, though, and I think investors have
better options for playing bullish outlooks for agriculture and/or
construction equipment demand.

With money and momentum flowing out of the biotech sector, there are
going to be a lot of beaten-down diamonds in the rough amidst the
wreckage. I'm not entirely convinced PTC Therapeutics (PTCT)
is a diamond, or at least not yet. While the company's lead compound
ataluren has a lot of promise, there some serious questions and concerns
about the drug. Bulls are right about the high-end potential here, but
prior trial failures shouldn't be ignored.

Saturday, April 12, 2014

If surgical robot pioneer Intuitive Surgical (NASDAQ: ISRG)
is going to keep its heady med-tech growth stock multiple, it has to
do better than this. After logging just 4% revenue growth in 2013,
Intuitive's announcement of a 24% drop to start 2014 is certainly not a
step in the right direction. Some of the trouble may well be from
transitory issues like weather and delays tied to hospitals awaiting new
product rollouts, but Wall Street is not a forgiving place when high
multiple growth stories stop delivering that growth.

As was the case when I wrote about South African platinum producer Aquarius (OTCPK:AQPTY), I can't help but feel a little sorry for management Impala Platinum (OTCQX:IMPUY)
(also known as "Implats"). Dealing with the rapacious government in
Zimbabwe was more than enough of a headache, and now the top three South
African platinum producers are dealing with an extended strike that is
running down their inventories and threatening significant cost
increases over the coming years.

At some point the strike in South Africa will end and Implats, Anglo American Platinum (OTCPK:AGPPY), and Lonmin plc (OTCPK:LNMIY)
will get back to business. The strike is likely running down global
platinum inventories, but there is certainly the risk that higher wage
costs at notoriously labor-intensive mines will weigh on the sector for
years. Barring yet another attempt from the government of Zimbabwe to
shake down the platinum miners, I would argue that Implats offers an
investors a rocky short-term road, but decent value for the long-term.

When it comes to publicly-traded companies, growth fixes a lot of issues and AngioDynamics's (ANGO)
return to revenue growth has seen the stock outperform nicely over the
past year. There are certainly considerable challenges left for
AngioDynamics management, including taking share from Bard (BCR) and Teleflex (TFX)
in vascular access and maximizing the value of newer offerings like
BioFlo and AngioVac. Efforts to restructure the business and generate
better margins are likewise a big part of the bull thesis.

These
shares are still in that grey area of "strong hold" for me. The shares
don't appear all that cheap by discounted cash flow, even giving
management the benefit of the doubt on margins, but the EV/revenue
multiple is quite low and this is often the number that institutional
investors follow. So long as the company can post better growth numbers
and keep the margin improvement story alive, I would think retesting the
high teens is a credible expectation.

While the bad winter weather early this year certainly had an impact
on some businesses, it doesn't seem to have hurt the industrial
distribution businesses as much feared. MSC Industrial (MSM) didn't see the same level of growth in its most recent quarter that HD Supply (HDS)
did, and the company did miss the published average sell-side revenue
target, but many analysts had this stock's earnings pegged as a likely
disappointment.

Instead of disappointing the Street, MSC
Industrial gave a relatively encouraging update regarding the U.S.
manufacturing sector and its business. Business still is far from
rampant recovery levels, but the company's efforts to add sales
associates and SKUs seem to be progressing on plan, as is the
integration of the large BDNA deal. The expected returns here are
looking increasingly ordinary, though, so I can't really pound the table
as hard on this stock today as in past articles.

I'm not a gold bug by any stretch, but I do like the basic business model pursued by precious metal royalty companies like Franco-Nevada (FNV), Royal Gold (RGLD), and Silver Wheaton (SLW).
By providing financing to mining companies and getting a low-cost cut
of their metal production in exchange, these companies offer leverage to
precious metal prices and better diversification of operating risks.
They're also something of a "heads I win, tails I don't really lose"
proposition, as periods of weaker metal prices limit miners' financing
options and allow royalty companies to set up new agreements on better
terms.

The long and short of it is that I believe Franco-Nevada
offers a pretty efficient way to gain exposure to precious metals. The
company has generally outperformed gold in good times and bad and also
offers a dividend stream - addressing one of the major complaints with
precious metal investments. These shares are not exactly cheap at around
1.9x NAV, but that's a little below the middle of the historical range
for a company with a good operating history and solid production growth
prospects in the future.

Picking Summer Infant (SUMR) as a Top Idea
in mid-October of 2013 has been a boneheaded move so far, as the stock
has declined about 25%. Summer Infant's share price weakness has come in
response to greater-than-expected struggles to migrate away from
low-margin licensed business and reduce SKU counts.

With new
management in place, Summer Infant is continuing its basic strategic
decision to slim down and refocus itself around a smaller number of more
profitable, more competitive SKUs. This is not an unusual or uncommon
phase in prior growth-by-acquisition stories, but the process can be
difficult and stretch on longer than investors' patience. Summer Infant
has a long way to go before it is a more credible threat to Dorel Industries (OTCPK:DIIBF), Newell Rubbermaid's (NWL) Graco, or Mattel's (MAT) Fisher-Price, but Summer Infant doesn't have to become the best to be better.

I liked demand response and energy management company EnerNOC (ENOC) six months ago
and the stock has done well since, rising about 40% as the brutal
winter weather brought attention back to the advantages of electricity
demand response. I still like this company, particularly as the company
shifts its attention to international DR markets and the sizable
opportunities in providing enterprises with tools to better analyze and
manage their energy needs.

The prime issue with EnerNOC remains
the volatile regulatory environment. PJM Interconnection, a major source
of EnerNOC's revenue, is serious about altering its rules for demand
response and those changes threaten a meaningful portion of today's
revenue and cash flow. Over time the company's efforts to diversify and
the underlying advantages of DR should smooth this out, but the
company's reported performance could be erratic in the meantime. That
complicates valuation, though today's price does not seem unreasonable.

Wednesday, April 9, 2014

There's a pretty good chance that if you use store-brand OTC consumer health products, you have a Perrigo (NYSE: PRGO)
product in your bathroom right now. Perrigo hasn't completely eschewed
the prescription-based generic drug business that build companies like Teva (NYSE: TEVA)
, but it has focused a great deal of its time and energy on ruling the
store-brand OTC market. That business now offers pretty solid cash flow
and returns, with plenty of growth opportunity in areas like diabetes
and pet care. Perrigo doesn't exactly carry a "store-brand" multiple
today, but these shares could still offer some upside as the company
looks forward to further OTC launches, additional M&A, and growth in
the nutrition and overseas markets.

When last I wrote about Universal Stainless & Alloy Products (USAP),
I was bullish on the long-term potential of the company's efforts to
upgrade its product mix, but skeptical about the valuation of the stock.
Since then, the shares are down about 7%, having spent the last six
months chopping between $32 and $38. In that time, that company's
progress on volume growth and mix has been frustratingly inconsistent.

I have a nerdish interest in metallurgy and companies like Allegheny Technologies (ATI), Carpenter Technology (CRS), A.M. Castle (CAS), and Haynes International (HAYN),
but following companies and science is a completely separate issue from
the stocks. I do generally like the potential for advanced alloy growth
in aerospace, power machinery, and oil/gas, and I also do believe that
vacuum induction melting (or VIM) products will skew USAP's mix higher
over time. Here and now, though, it's hard to call the shares
undervalued, with an apparent fair value around $33 to $37.

I liked Parker Drilling (PKD) and its turnaround/self-improvement story
about six months ago, and while the idea worked pretty well for a short
time (the stock rose about 30% in the first month after that article),
performance has trailed off noticeably since March as the company warned
that 2014 would be off to a slower start. With that, the shares have
been left behind by other small-cap energy service providers and
contract drillers.

The sluggish start to 2014 is disappointing,
but the Parker Drilling story is still worth a closer look. The company
is the leading player in domestic drilling barges, earning a dayrate
premium for the quality and capabilities of its rigs. The company's
international land rig business is seeing better utilization, and there
is a significant opportunity in the tool rental business from expanding
operations in the Gulf of Mexico (or GOM) and improved margins in the
international business (or ITS). A fair value of around $8 may not
scream "must own" today, but it is worth a look as a relative laggard in
the space.

Bullish sell-side analysts have long pushed Vistaprint N.V. (VPRT)
as a way to play growth in small businesses and the advantages of
online/web-based disintermediation in bringing more sophisticated
marketing tools to the SMB sector. It all sounds good (it always has),
but Vistaprint seems stuck in this yo-yo business model where
sustainable, balanced growth seems elusive.

The market has apparently started turning its back on small caps, and that is likely to produce some long-term values. I think Marlin Business Services (MRLN)
is starting to earn its way onto that list. Marlin is a good play on a
small business recovery, and the company's over-capitalized balance
sheet and low cost of funds gives management considerable flexibility. I
haven't always been so fond of the stocks' valuation, but this 30%-plus
pullback from the high is starting to look a little excessive.

Tuesday, April 8, 2014

Facing declining market share in its core generic controlled
substance (painkillers) market and holding the valuable asset of an
Irish tax domicile, Mallinckrodt plc (NYSE: MNK) has aggressively put its balance sheet to work. First the company announced a $1.3 billion deal for Cadence Pharmaceuticals (NASDAQ: CADX)
and its hospital-centered Ofirmev product (injected acetamenophen).
Now the company is taking an even bigger swing – announcing a $5.6
billion deal for controversial Questcor (NASDAQ: QCOR) and its lead drug Acthar.

If Mallinckrodt can steer Questcor past the rocks that short
sellers have been loudly claiming are in the company's path, this deal
could double Mallinckrodt's earnings in relatively short order. If the
short sellers are proven right about the many and varied problems of
Questcor and Acthar, Mallinckrodt's shareholders will pay the price.

To buy when others seemingly can't sell fast enough takes a lot of
guts (and other less family-friendly attributes), but it can be one of
the best ways to exploit Wall Street shortsightedness. Small-cap
oncology immunotherapy biotech Celldex (CLDX)
has gotten swept up in this biotech bubble-popping, even though the
data from the company has generally been positive and supportive of the
idea that this company has some promising high-potential drugs.

On
a risk-adjusted basis, I calculate a fair value of $29 per share for
Celldex, suggesting significant upside from today's level. Readers have
to consider two key risks here. First, there is the ever-present biotech
risk that Celldex's drugs will fail in advanced clinical studies and
never make it to market. Second, there is a growing risk that investors
are cycling out of biotech and may no longer be willing to use the same
long-term revenue multiples and discount rates. A true rout in the
biotech space could take these shares down another 50% without any bad
news from the company, but investors who can stomach that risk as the
price of admission to a potential winner should look further into this
story.

On at least one level, Tenneco (TEN)
offers a compelling story. European governments take emissions control
fairly seriously, China is starting to take it more seriously, and while
the commitment in the U.S. seems to wobble from administration to
administration (or Congress to Congress), it has been marching toward
higher standards. As the second-largest emissions player in the world
(with around 22% share in light vehicles and 10% share in commercial
vehicles), that should feed ongoing growth for Tenneco.

The
problem is less about the story and more about the timing and valuation
of that opportunity. Bullish analysts have been pushing a margin
leverage and commercial vehicle growth story for a little while now, but
the timelines keep sliding to the right. I don't disagree that Tenneco
will get there, but the timing does have valuation implications.
Although Tenneco's long-term DCF-based valuation isn't so impressive,
the recent sell-off has pushed the price to a more attractive level on
an EV/EBITDA basis.

Waiting for the market to realize the value in PICO Holdings (PICO)
is not unlike waiting for paint to dry. The shares are up all of 9% in
the past 12 months, though the six-month performance (up 11%) is a
little better. Part of the problem is that so much of the company's
asset base rests on a stronger housing market in the
Western/Southwestern U.S., and that just hasn't materialized yet. While I
would suggest investors who want to own holding company-type
investments should certainly consider names like Brookfield Infrastructure (BIP) or Macquarie Infrastructure (MIC), PICO does have some appeal for those investors particularly interested in playing a Western/Southwestern housing recovery.

Biotech investing is not where you go if you want an easy investing
life, but the profits of patience and good stock selection can be
significant. Investors are clearly nervous about biotech now, and there
is a threat that sector-wide selling in these notoriously fickle stocks
will put them in hibernation until the cycle turns around again.

Specific to Alnylam (ALNY),
though, I would argue the company has never been stronger. The company
is on pace to exceed its target of having five compounds in human
studies by the end of 2015 ("5 x 15"), and a recent deal with Sanofi (SNY)
gives Alnylam development funding, a motivated commercial partner, and
the perception that it has been vetted by a large pharmaceutical company
with a significant presence in rare diseases.

Alnylam is
absolutely a risky pick, and investors should not ignore the risk that
not only may the company's drugs fail in the clinic or in the
marketplace, but that investors indiscriminately bailing out of the
sector could weigh on the share price at times. On the flip side, I
cannot ignore that Alnylam has multiple potential billion dollar-plus
drugs in the clinic and a very strong R&D position in what could
prove to be one of the next major therapeutic alternatives. With that, I
see almost 50% upside in Alnylam shares today.

The last six months have not been easy ones for small-cap
semiconductor equipment and product companies. Those with exposure to
LED, solar, or other non-semiconductor markets like Advanced Energy Industries or Veeco have done alright, but it has been a more challenging run for the likes of Mattson (MTSN), FormFactor (FORM), and Cascade Microtech (CSCD).

I'm
still relatively bullish on Cascade, though. True, order and activity
levels have not picked up as much as projects back six months ago, but
Cascade is still leveraged to the increasing sophistication of chip
production, as new process nodes, materials, structures, and wafer
geometries will all require the company's probe cards. What's more,
management has launched new tools like the CM300 and APS200 and acquired
new capabilities that should make it more competitive in the wafer
probe markets for advanced logic and SoCs.

Monday, April 7, 2014

Pfizer (NYSE: PFE)
could use another blockbuster right now, and data presented from the
phase 2 PALOMA-1 study for its CDK 4/6 inhibitor palbociclib over the
weekend suggests it likely has one. The only major issue now could be
the Street's already aggressive expectations, particularly as they
pertain to Pfizer filing for approval on the basis of phase 2 data and
getting to the market ahead of Lilly (NYSE: LLY) and Novartis (NYSE: NVS) .

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I started this blog as a way of archiving my writing for sites like Investopedia, as well as posting some thoughts on the markets, stocks, or whatever else strikes my fancy.
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You can reach me at tuonela (dot) fool (at) gmail (dot) com

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Information is taken from sources believed to be reliable but no warranty or guarantee is made with respect to accuracy.

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